DOE’s Grid Resiliency Notice of Proposed Rulemaking: Initial Comments

Comments on the Department of Energy’s (“DOE”) Notice of Proposed Rulemaking (“NOPR”) on Grid Reliability and Resilience Pricing were submitted October 23, 2017. More than 450 entities and individuals filed comments addressing various issues raised by the NOPR. Overall, it appears that the DOE has indeed started a fulsome debate regarding grid reliability and resiliency, adding to the discussion already underway at the Federal Energy Regulatory Commission (“FERC”) regarding market operations, reliability and resilience and state/federal jurisdiction. Notwithstanding the volume of comments, it will be interesting to see whether FERC will adopt the DOE’s proposal in full, as proposed, or within the time frame suggested by DOE. It is possible FERC may institute additional proceedings to further investigate issues regarding fuel security and grid resilience.”

In a development that demonstrates the potential impact of DOE’s action, a group of former FERC Commissioners – including former Chairs Moler, Hoecker, Wood, and Wellinghoff, and former Commissioners Santa, Breathitt, Brownell, and Kelliher – submitted comments challenging several of the NOPR’s proposals. The former Commissioners state that the NOPR “would be a significant step backward from the Commission’s long and bipartisan evolution to transparent, open, competitive wholesale markets.” The former Commissioners note that the NOPR proposes to subsidize certain resources, which will “drive out the unsubsidized resource” and “inevitably raise prices to customers.” They go on to say that FERC has always been “fuel-agnostic.” They also agree that the markets can be improved and encourage FERC to respond to the DOE NOPR by identifying those aspects of the markets that should be improved and institute additional proceedings to examine those concerns on a national or regional basis. Finally, the former Commissioners note that few electrical system outages are related to generation; most are related to problems in the transmission or distribution sectors, and that certain RTOs have recently adopted proposals to enhance generator performance.

A number of commenters oppose the NOPR on grounds similar to those raised by the former Commissioners. For example, Potomac Economics, Inc. (“Potomac”), which serves as the market monitor for a number of Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”), notes that DOE failed to define resilience or the contingencies the NOPR seeks to address. As a result, Potomac notes that the NOPR’s proposal that resilient resources have 90-day fuel supplies on hand cannot be justified. Potomac points out that extreme weather conditions usually last far fewer than 90 days, that natural gas pipeline repairs are usually completed in less than 90 days, and that Midcontinent Independent System Operator has experienced problems with coal supplies because of railway congestion. Like the former Commissioners, Potomac believes that the competitive markets can be improved, but believes issues of reliability and resilience should be resolved through the markets, rather than through DOE’s cost-based methodology. The Interstate Natural Gas Association of America (“INGAA”), among others, cited to an October 2017 study by the Rhodium Group that states: “Of all the major power disruptions, nation-wide over the past five years, only 0.00007% were due to fuel supply problems.” Many commenters said that the current RTO and ISO markets could be improved, but that the NOPR should not be the basis for any such improvements.

Many commenters from the utility sector, the natural gas sector, the state regulatory sector, and certain consumer advocates, filed comments making similar statements regarding the vagueness and anti-competitive nature of the DOE proposal. Others noted that the concerns regarding fuel security and resilience vary by region, and that cost-allocation issues will need to be addressed if RTOs and ISOs change their price formation to reflect these concerns. In addition, several environmental advocates filed comments opposing the NOPR because it is designed to increase the use of coal as a generation resource, and thus may lead to increased carbon emissions.

Finally, many commenters opposing the NOPR took issue with the short time frame provided for comments in this docket. They noted that the issues raised in the NOPR are complex and differ greatly by region. Moreover, many RTOs and ISOs have FERC-approved rules governing the manner in which market changes must be considered and adopted. These commenters state that the short time frame contemplated by DOE simply does not accommodate these obligations. For example, the National Association of Regulatory Utility Commissioners (“NARUC”) comprised of several hundred state utility regulators across the country and U.S. territories, stated that it “would welcome the opportunity to explore issues [of fuel diversity, reliability, and resilience, among others] and options for addressing them that would not disrupt the wholesale markets, as we fear DOE’s current proposal would.” NARUC recommends that additional time is needed to examine these issues and, like several commenters, NARUC suggested FERC institute further proceedings to examine them. A number of commenters also pointed out that, if FERC were to require modifications to already-approved market mechanisms, FERC would first have to find that the existing mechanisms are unjust and unreasonable pursuant to section 206 of the Federal Power Act (FPA). According to these commenters, the DOE NOPR provides insufficient evidence to meet these legal standards.

In contrast, FirstEnergy Service Company (“FirstEnergy”) submitted lengthy and detailed comments supporting the NOPR, and proposing specific tariff and contractual proposals to implement it. FirstEnergy also filed six affidavits supporting its proposals. FirstEnergy states that the current wholesale markets are hybrid in nature. They have provisions regarding reliability must-run units, uplift agreements, and market power mitigation rules. In addition, FirstEnergy notes that renewable resources receive tax benefits and benefits in the form of state-mandated renewable portfolio requirements in many states. Thus, FirstEnergy says that the NOPR is simply another market refinement designed to enhance long-term grid stability. FirstEnergy states that fuel diversity can mitigate the risks faced by a catastrophic event, but points out that many coal and nuclear-fired units have retired and plan to retire because of insufficient compensation in the wholesale markets. As a result, FirstEnergy asks the FERC to find current RTO and ISO tariffs to be unjust and unreasonable under section 206 of the FPA, and to find that the DOE proposal, with certain modifications, is the just and reasonable alternative. FirstEnergy’s comments include specific tariff proposals for “Resiliency Support Services,” and a pro forma Resiliency Support Service Agreement in order to implement the DOE proposal.

Murray Energy Corporation (“Murray”) also submitted comments in support of the NOPR, claiming that a recent study performed by IHS-Markit demonstrates that, on a going-forward basis, the costs of operating recently-retired plants is “significantly lower than the long-term marginal cost of building new generation.” Murray states that the retirement of coal and nuclear-fired units exposes consumers to the risks of severe price spikes in natural gas markets, and says that FERC’s focus on short-term marginal costs fails to maximize operating efficiency over the longer-term planning horizon used for investments in baseload generation facilities. Murray goes on to say that the current wholesale markets are not fuel-neutral, because they are designed in a short-term manner that precludes the addition of new coal or nuclear resources. Other comments, on the other hand, do not specifically support DOE’s proposals, but strongly support the need for FERC to further examine the effects of fuel diversity and fuel security on system reliability and resilience.

Similarly, trade associations representing the coal and nuclear industries supported the goals of the NOPR. These organizations state that the wholesale markets do not appropriately recognize the value of fuel security and diversity. They also agree with FirstEnergy, Murray, and others that the existing wholesale markets are not fully competitive, and that they should be modified to enhance resilience. Additionally, several entities that do not often participate in FERC matters, such as unions or industrial companies serving coal interests, submitted comments that generally support the NOPR’s goals of ensuring that coal and nuclear plants remain in service. Many of these commenters noted the effect that retirements of coal plants have on local communities.

While the NOPR proposed that the new rules become effective prior to the winter heating season, a number of commenters noted that it would be extremely difficult to meet DOE’s aggressive timeline. The comments suggest that FERC commence a process to carefully evaluate fuel security, resilience, and the need for market changes. Moreover, FERC staff recently issued a report on the circumstances facing the energy industry this winter. In contrast to some of the statements made by the DOE in the NOPR, the FERC Staff report indicated that few, if any, reliability concerns are expected in the upcoming months.

Reply comments on the Grid Reliability and Resilience Pricing NOPR are due November 7, 2017 and Reed Smith will prepare a subsequent alert after reply comments are filed. At this point, it is possible that FERC will use the DOE’s proposal to instigate a more detailed analysis of the reliability and resilience pricing issues identified by the DOE. Thereafter, FERC may issue a subsequent NOPR on this topic, or may schedule technical conferences for participants to address these issues.